Robert Brown: We really do need an expanded Canada Pension Plan

Canada Pension Plan Investment Board President and Chief Executive Officer Mark Machin speaks with Michel Leduc, left, and Edwin Cass, right, as they wait to appear at the Standing Committee on Finance on Parliament Hill, in Ottawa.Adrian Wyld / THE CANADIAN PRESS

The Fraser Institute argued recently that the federal government has failed to make a convincing case for Canada Pension Plan expansion. But their viewpoint depends on trying to determine how much income Canadians need to retire with dignity.

Do we require a 50-per-cent replacement of final earnings, or is it 70 per cent? Does spending go up or down when we retire? Can you sell your house and move to a less-expensive region? Since none of these questions have solid, precise answers, the Fraser Institute can claim the feds have not made the case for an expanded CPP.

I have wasted a few hours recently watching the U.S. presidential debates. I often find myself shaking my fist at my TV screen yelling: “You have not answered the question!” I feel the same way about the Fraser Institute’s analysis on CPP. While it is accurate, it does nothing to shed light on the matter at hand.

Thankfully, we have solid Canadian research available to let us know if future generations of Canadian workers can retire with dignity.

A 2015 McKinsey report uses survey results and concludes that 17 per cent of the future elderly will suffer a decline in their standard of living in retirement. A 2009 study prepared for the Research Working Group on Retirement Income Adequacy used income-tax data and concluded that 22 per cent of future elderly will suffer a significant decline in their standard of living.

The best available data all have the same bottom line: expect a significant decline in living standards at retirement.

All four studies show that the risk of a declining standard of living in retirement is largely a middle- and upper-income earner problem, concentrated among the youngest age groups and those not participating in a workplace pension plan. For low-income workers, the combination of OAS and GIS will replace more than 100 per cent of their final earnings.

Do these studies “prove” the need for expansion of the CPP? No — no more than the Fraser Institute study made the case against it. But they demonstrate that a significant proportion of future retirees is going to suffer deterioration in their living standards.

What should be done?

One answer is to “do” nothing. We’ve been doing just that for several decades and seen the steady erosion of retirement income security systems. Fewer workers today than 50 years ago have workplace pensions. Only 38 per cent of employees participate in a Registered Pension Plan. And, clearly, Canadians are not filling the void with increased personal savings. Instead, they take on ever-increasing levels of debt.

Many employers have also stopped sponsoring defined-benefit pensions, finding them costly. At the same time, the financial crisis of 2008/9 has shown the frailty of achieving retirement income security through defined contribution plans.

Workers without workplace pensions must manage their own investments, creating risk. They can mitigate the risk by hiring an investment advisor but that only shifts the investment risk to an expense risk. Advice can cost as much as three per cent of the gross rate of return. If funds earn, for example, five per cent and inflation runs close to two per cent, then there is no real return.

We can continue to dither or we can act. If we are to act, finding an efficient and effective means of increasing retirement income security would clearly lead us toward a compulsory, large, defined-benefit plan. That just happens to look a lot like an expanded CPP.

Robert Brown is an expert advisor with EvidenceNetwork.ca and a fellow with the Canadian Institute of Actuaries. He was professor of actuarial science at the University of Waterloo for 39 years and a past president of the Canadian Institute of Actuaries.

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